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Real Estate Tech Companies Battling High Mortgage Rates

Welcome to The Interchange, where we delve into the hottest fintech news of the past week. In this edition, we uncover the struggles faced by real estate tech companies in the wake of skyrocketing mortgage...

Welcome to The Interchange, where we delve into the hottest fintech news of the past week. In this edition, we uncover the struggles faced by real estate tech companies in the wake of skyrocketing mortgage rates. We also explore an innovative employee ownership buyout option offered by a startup. So let's dive in!

From a $2B+ Valuation to Rounds of Layoffs

Real estate tech startup Divvy Homes recently experienced its third round of layoffs within a year, highlighting the challenges faced by the sector. Initially, Divvy Homes gained attention in September 2019 when it secured a $43 million Series B funding round. The company aimed to assist more Americans in transitioning from renters to homeowners. In February 2021, Divvy Homes raised $110 million in Series C funding.

However, the landscape changed drastically in 2022. Mortgage rates soared, resulting in fewer people entering the housing market. As a company that purchases homes and rents them out to individuals seeking equity, Divvy Homes faced difficulties. Rising interest rates forced the company to charge higher rents to cover their mortgages, leading to financial strain. Consequently, Divvy Homes laid off approximately 40 employees in September 2022. The situation worsened, and in February 2023, an additional round of layoffs affected 94 employees, almost half of the company's staff.

Sadly, Divvy Homes is not alone in facing these challenges. The real estate tech, or proptech, sector as a whole has been heavily impacted by the surge in mortgage interest rates. Established companies like Opendoor, Compass, and Redfin, as well as startups like Better.com and Homeward, have witnessed layoffs. Some startups, like Reali, even had to shut down operations completely.

A New Buyout Option for Employees

In the realm of small businesses, transitioning to new ownership can present various challenges. While some startups acquire companies without succession plans, that may not always align with a company's needs. Enter Common Trust, a startup that offers an employee ownership buyout option. Recently, the company secured $2.6 million in seed funding, led by Crossbeam Venture Partners.

Common Trust was founded in 2022 by Zoe Schlag and Derek Razo, who recognized that many employees desire to remain at companies with outstanding corporate cultures and a history of customer-centricity. At the heart of Common Trust lies a unique legal framework called a perpetual purpose trust. This framework allows small businesses to exit while maintaining their independence.

According to Zoe Schlag, employee ownership is the most scalable approach for this market segment. It preserves generational businesses and quality jobs across America, all at a fraction of the cost typically charged by brokers for such transactions.

Weekly News Recap

In other fintech news, Square experienced an outage due to a DNS (domain name system) issue, causing inconvenience for customers and small businesses. Central banks hiking interest rates have also put fintech business models under pressure, potentially leading to a collapse. Citizens Bank is launching a new private bank focused on startups, positioning itself as the go-to bank for the innovation sector.

Fundraising and M&A Updates

In the fundraising and mergers and acquisitions space, Perfios secured $229 million for its real-time credit underwriting solutions. Swan gathered $40 million to bring embedded banking services to Europe. Parallax aims to simplify cross-border payments by removing friction. Alza emerged from stealth mode to offer affordable and inclusive financial tools to immigrants.

These are just a few highlights from the expanding fintech landscape. Stay tuned for more exciting developments in the future!

Discover the Fintech Stage at Disrupt 2023

Don't miss out on the Fintech Stage at TechCrunch Disrupt 2023! Join us in San Francisco on September 19-21, where we'll be exploring web3, banking, and other exciting facets of the fintech world. Limited passes are still available. Register now with the code INTERCHANGE to save 15% off your ticket!

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There you have it - the latest updates from the world of real estate tech and fintech. While the industry experiences its fair share of ups and downs, it remains an intriguing and ever-evolving space. Stay informed and keep exploring the fascinating world of real estate, mortgages, and finance!